Home >companies >Consumer goods makers tighten belt as slowdown’s bite worsens

Mumbai: Manufacturers of consumer packaged goods like Hindustan Unilever Ltd, Proctor and Gamble, ITC Ltd and Marico Ltd are cutting back on production, extending the credit period to distributors and exploring ways to reduce costs and increase efficiencies as consumers continue to hold spending in a slowing Indian economy.

“Consumers are cutting back on consumption and non-essential purchases and the growth is nowhere near to what we were expecting," said Vivek Gambhir, managing director, Godrej Consumer products Ltd, adding that he expects volume growth for the sector to be negligible or even contract in the just concluded December quarter.

Marico, the maker of Parachute and Saffola oil, has reduced the number of shifts at its Paonta Sahib plant near Dehradun from three to two. “We have reduced the number of shifts at Paonta Sahib as we are looking at increasing efficiencies," said an official at Marico, who did not want to be named.

In the tax free zone of Baddi, manufacturing activity has fallen by about 30% in the past 6-8 months, according to Nikhil Nanda, managing director, JHS Svendgaard Laboratories Ltd, a manufacturer for multinationals like Proctor and Gamble India and Hindustan Unilever.

Baddi is an industrial town in Himachal Pradesh where companies like Colgate-Palmolive (India) Ltd, Procter and Gamble India, Hindustan Unilever, Mondelez International Inc and Johnson and Johnson Ltd have set up manufacturing units.

According to data by research firm IMRB International, which tracks sales in 30 core consumer categories such as soaps, shampoos, detergents and packaged staples, growth across rural markets between January and September slowed to 4% from 7% in the year-ago period.

Urban growth (across categories) declined from 8% to 2% in the same period, the report added.

“Over the past 12 quarters, domestic fast moving consumer goods (FMCG) revenues have grown at 1.2x the nominal Gross Domestic Product (GDP) growth. The third quarter of the fiscal year 2014 will see the first trend reversal, and FMCG domestic revenues will grow at 0.9x nominal GDP growth," said analysts Anand Mour and Sreekanth P.V.S of ICICI Securities Ltd in a 3 January report.

Experts say the outlook for growth remains muted for the next six months as there will be no fresh trigger for growth before the national election in April-May and high inflation will continue to persist.

“Growth in the October-December quarter has been flat resulting in a weak order pipeline in the domestic market," said Vishal Arora, vice-president, global sales and marketing, Advanced Surfactants India Ltd, one of the largest producers of linear alkyl benzene sulphonic acid (LABSA), a raw material used primarily for making detergents and soaps.

Besides cutting back on production, manufacturers of soaps, shampoos and detergents are also exploring ways to offset increasing costs of raw materials by substituting them with cheaper alternatives.

“With the dollar-rupee volatility and prices of crude increasing in the past few months we have looked at substituting LABSA with vegetable oil-based surfactants in making soaps and detergents," said G. Ramakrishnan, director (home and personal care business), Galaxy Surfactants Ltd, a supplier to companies like Colgate, Unilever, Henkel and Reckitt Benckiser.

Additionally, to beat the slowdown, which has been more acute in the personal care and premium segments, Galaxy has moved its focus to exports and the homecare segment, said Ramakrishnan.

Likewise, JHS Svendgaard Laboratories Ltd, has increased its export orders by 20%, yet the company will see its revenue growth drop this fiscal year due to lower domestic sales, according to Nanda.

Emami Ltd, the maker of Fair and Handsome fairness cream and antiseptic cream Boroplus, said its focus is on reducing costs, asking all departments to work out cost-saving measures as it predicts a tough fiscal year 2014.

“We have slowed down on geographical expansions, and not increasing the number of outlets under our coverage," said Krishna Mohan, chief executive at Emami.

The slowdown in offtake of packaged goods has also impacted traditional trade distributors as retailers delay payments.

“Customers are holding back on payments and our collection cycle has been extended by 20-25%," said Jitendra Agarwal, a distributor in rural Nashik for companies like Dabur India Ltd.

Even distributors in Mumbai and Pune for companies like Hindustan Unilever and ITC admit to delayed payments from retailers.

Close to 95% of retail in India happens through general trade, which consists of millions of small neighbourhood stores.

Consumer packaged goods manufacturers reach these stores through distributors who extend credit terms to the stores.

As such, “any delay in payment results in elongating the billing cycle...has an impact on the throughput", said the ICICI analysts in the report cited above, adding that traders are becoming cautious when extending credit.

Consumer packaged goods manufacturers are also looking at alternatives such as separate bills for slow moving and fast moving consumer goods, extending the credit period and interest-free supply of goods to overcome the liquidity crunch faced by distributors.

In the September quarter, Marico spoke about reducing inventory days with distributors, said the ICICI report, adding that a couple of other FMCG companies have also started working on this option.

“We are trying pilots where we have separate billing for items that have demand like Choco Pie. We are also experimenting with selective extension of credit period in a few metros," said Milan Wahi, managing director, Lotte India Corporation Ltd, a manufacturer of confectionery product.

But it’s too early yet to say if these efforts are working, he said.

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